Get Ready for Talk of an Apple Dividend Hike

Apple Inc. (NASDAQ: AAPL) remains a great value company that creates great computing and electronics products. The problem is that Apple remains very unexciting, and whenever CEO Tim Cook makes news it is just never with the same emphasis and oomph that Steve Jobs was able to convey.

Now we are getting ready for Apple to boost its dividend when it announces earnings in April. Apple borrowed billions last year to help facilitate a buyback and dividend, rather than paying a penalty for repatriating much of its war chest. So, Apple has paid this $3.05 per quarter yield for four straight quarters. Its most recent hike was a mere 15%, rising to $3.05 from $2.65 per share.

Apple sounds like a solid dividend yield at 2.3%. After all, it is the largest market cap stock and is the greatest growth story of the past generation. Apple also trades at only 12.5 times earnings. In theory, that leaves major room for a dividend hike.

Unfortunately, the practicality of the dividend is a bit more complicated. The bulk of Apple’s cash balance of more than $150 billion is outside of the United States and would come at a steep penalty for repatriation. Apple said with its previous earnings report that international sales accounted for 63% of its quarterly revenue.

The $12.40 annualized payout of today compares to annualized earnings expectations of $42.79 per share for 2014, up almost 8% from the $39.75 reported last year. Thomson Reuters also expects that Apple’s earnings will grow to $46.42 in 2015. That means that Apple’s dividend payout rate of normalized earnings is likely to be only 29% for this year if the rate is kept static.

So, here is the real trick: guessing what Apple WILL do rather than stating what we think it SHOULD do. We think that Apple should raise its dividend up to $4.00 per share, which would generate right at a yield of 3.0% (2.99%). That being said, we believe that Apple will raise its payout to a minimum of $3.50 per share, and our guess is that likely it will rise to $3.55 or $3.60 per share.

Before getting too excited about the dividend, the more important news may come from the buyback progress. Still, Tim Cook needs to better communicate that message other than “we are buying stock back every day.” Perhaps its CFO transition will make that message a bit clearer.